Millions of UK pensioners will be forced to pay income tax on their state pension from April 2026, according to new analysis from Deutsche Bank.
The bank’s forecasts suggest the state pension will rise to £12,631 next year, pushing it above the frozen personal allowance threshold of £12,570 for the first time.
This breach of the tax-free allowance means nine million pensioners will face income tax on their state pension payments, in what has been dubbed “Labour’s retirement tax”.
Deutsche Bank forecasts the triple lock will trigger a 5.5 per cent increase in state pension payments next year, driven by projected growth in average weekly earnings.
Sanjay Raja, Deutsche Bank’s chief UK economist, said: “As of right now, our projection for AWE in the three months to July sits at 5.5 per cent year on year.”
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Analysts are sounding the alarm over a looming tax on the state pension
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The bank expects this rate to exceed inflation, which is projected at 4.25 per cent for September 2025.
Under the triple lock guarantee, state pensions rise annually by the highest of either inflation, average wage growth, or 2.5 per cent.
Initially, pensioners will face a modest tax bill of £12 from April 2026, though HMRC may not pursue this small amount in the first year.
Former pensions minister Sir Steve Webb, now a partner at LCP, warned retirees would need to prepare for future tax obligations.
“Pensioners may well have spent the money because the bill isn’t known until after the tax year so people will have to set aside a bit of their pension. We’re not talking about rich pensioners,” he said.
Previous analysis has revealed that a quarter of a million pensioners already pay four-figure tax bills on their state pension.
Chancellor Rachel Reeves has maintained Jeremy Hunt’s freeze on the personal allowance at £12,570 until 2029.
The tax threshold freeze was initially implemented by Hunt until 2028 during his tenure as Conservative chancellor.
An HM Treasury spokesman defended the Government’s position, stating: “The state pension is the foundation for ensuring pensioners are able to live with the dignity and respect they deserve.
“We are committed to the triple lock and pensioners whose sole income is the new state pension and who have not deferred or receive protected payments do not pay any income tax.”
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Older Britons are concerned about paying more tax following the Chancellor’s Budget decisions
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Labour has pledged to increase tax thresholds in line with inflation from April 2028, though recent poor growth figures have reduced the Chancellor’s fiscal headroom.
Analysis by LCP suggests the number of pensioners paying income tax will continue to rise dramatically, with 10 million expected to be paying by 2032.
During the election campaign, former Prime Minister Rishi Sunak had warned about Labour’s “retirement tax” on state pensioners’ income.
The Conservative manifesto had proposed a “triple lock plus” policy that would have increased pensioners’ tax-free allowance alongside state pension rises, though Labour dismissed these plans as not “credible”.
